Rate rise likely – BIS Shrapnel

Economic and industry forecaster BIS Shrapnel has outlined a strong future for Perth’s construction industry in its latest Building Industry Prospects Report.

Both the residential and non-residential sectors are forecast to continue with strong growth into the future as Western Australia’s economic prosperity continues.

Although total house commence-ments were steady over the past year, a 3 per cent increase is expected for the 2005-06 financial year.

BIS said that, although official data was yet to show it, interstate migration to WA shifted to a sizable positive net inflow in 2004-05, and that a forecast net migration of about 6,000 would contribute to underlying demand for 23,750 homes in WA in 2005-06.

“Housing affordability remains attractive by comparison with the eastern states capitals, providing further upside to residential property prices,” the report said.

It said that the construction of the NewMetro railway project from Perth to Mandurah would add significant value to residential developments in regions adjoining the train line.

BIS considers interest rates and the degree of growth in residential building prices as the primary risks to WA’s residential building market.

“Rising building costs are expected to be a factor in the lower number of apartment project, as cost pressures dampen developer margins in a similar fashion to that observed in the eastern states capitals,” the report said.

“The greater availability of land is Perth’s key comparative advantage – the opening up of regions to the south of Perth by the new rail line should encourage competitive land prices.”

In the non-residential sector, office construction is expected to underpin overall strong growth.

Major projects started this year or expected to start this year in WA include the Christmas Island Detention Centre ($208 million), Hay St Law Courts ($140 million), Midland Gate extensions ($85 million), Coles Myer Distribution Centre ($60 million), and the Coral Bay Hilton Spa Resort ($50 million).

The tightening of office space is expected to cause an 87 per cent surge in office construction, and strong growth is also forecast for hotels (74 per cent), other business premises (59 per cent), and factories (22 per cent).

BIS also issued a warning this week that households and businesses face more interest rate rises next year as the Reserve Bank responds to the issues of rising inflation, capacity restraints, stalling productivity and escalating wage costs. It said the Australian economy was on the brink of an inflation surge.

Forecasting a 1 per cent interest rate rise next year, project manager and senior economist Matthew Hassan said skilled labour shortages would lead to wage rises, which will flow on to price increases.

“Until recently, rising wage pressures had been confined to the construction and mining sectors, with little spill over to other parts of the labour market, but now we’re starting to see a more generalised pick-up in wages growth, and a noticeable acceleration at the skilled end of the labour market,” Mr Hassan said.

“Low labour productivity growth means companies must either pass these cost increases on as price increases or absorb them into bottom line profitability.”